Document of The World Bank Public Disclosure Authorized FOR OFFICIAL USE ONLY

Report No: 23736

IMPLEMENTATION COMPLETION REPORT (IDA-25630)

Public Disclosure Authorized ONA

CREDIT

IN THE AMOUNT OP SDR 108.4 MILLION

TO THE

PEOPLE'S REPUBLIC OF

FOR A SECOND RED SOILS AREA DEVELOPMENT PROJECT Public Disclosure Authorized

March 21, 2002

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective February 2002) Cunrency Unit = Renniinbi (RMB3) Yuan (Y) Yl.0 = US$ 0.12 US$ 1.0 = Y8.3

FISCAL YEAR January I December 31

ABBREVIATIONS AND ACRONYMS ABC Agricultural Bank of China CPI Consumer Price Index CPMO Central Project Management Office ERR Economic Rate of Return FAO/CP FAO and World Bank Cooperative Program FRR Financial Rate of Return ha hectare ICB International Competitive Bidding IMSERC Inner Mongolia Snowstorm Emergency Recovery Component IPM Integrated Pest Management LCB Local Competitive Bidding MOA Ministry of Agriculture MOF Ministry of Finance NCB National Competitive Bidding NPV Net Present Value PLG Project Leading Group PMO Project Management Office PRC People's Republic of China PSR Project Status Report ROE Return on Owner's Equity SAR Staff Appraisal Report SCF Standard Conversion Factor TA Technical Assistance TC Technical Comnmittee TOR Terrns of Reference WTO World Trade Organization

Vice President: Jemal-ud-din Kassum, EAPVP Country Manager/Director: Yukon Huang, EACCF Sector Manager/Director: Mark D. Wilson, EASRD Task Team Leader/Task Manager: Achim Fock, EASRD FOR OFFICIAL USE ONLY

CHINA SECOND RED SOILS AREA DEVELOPMENT PROJECT

CONTENTS

Page No. 1. Project Data 1 2. Principal Performance Ratings I 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 4 5. Major Factors Affecting Implementation and Outcome 8 6. Sustainability 9 7. Bank and Borrower Perfornance 10 8. Lessons Learned 12 9. Partner Comments 13 10. Additional Information 13 Annex 1. Key Performance Indicators/Log Frame Matrix 21 Annex 2. Project Costs and Financing 22 Annex 3. Economic Costs and Benefits 24 Annex 4. Bank Inputs 25 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 26 Annex 6. Ratings of Bank and Borrower Performance 27 Annex 7. List of Supporting Documents 28 Annex 8. Borrower's ICR Summary 29 Annex 9. Photographs 38

This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

ProjectID: P003595 ProjectName. SECOND RED SOILS AREA DEV. PROJECT Team Leader: Achim Fock TL Unit: EASRD ICR Type: Core ICR IReport Date: March 21, 2002

1. Project Data Name: SECOND RED SOILS AREA DEV. PROJECT L/C/TF Number: IDA-25630 Country/Department.- CHINA Region: East Asia and Pacific Region Sector/subsector: Al - Irrigation & Drainage; AL - Livestock; AM - Agro-Industry & Marketing; AP - Perennial Crops; AQ - Annual Crops

KEY DATES Original Revised/Actual PCD: 01/10/1991 Effective: 06/21/1994 06/21/1994 Appraisal: 06/16/1993 MTR: 05/31/1997 05/13/1997 Approval: 02/03/1994 Closing: 06/30/2001 09/30/2001

Borrower/lmplementingAgency: PRC/MOA Other Partners:

STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Gautam S. Kaji Country Manager: Yukon Huang Shahid Javed Burki - Department Director Sector Manager: Mark D. Wilson Joseph R. Goldberg - Division Chief Team Leader at ICR: Achim Fock John Stemp ICR Primary Author: Achim Fock; Xueming Liu

2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: HL InstitutionalDevelopment Impact: SU Bank Performance: S Borrower Performance:S

QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 OriginalObjective: The objective of the project was to increase production and productivity over a wide area of degraded red soils in the provinces of , Fujian, , Zhejiang, and the Guangxi Autonomous Region; to help alleviate poverty by increasing the income of currently underemployed farmers; and to benefit the environment by improving soil and water conservation, reducing erosion and promoting sustainable land use and agricultural practices. These objectives were in line with the Government's long-term strategies and policies for the agricultural sector as formulated in the early nineties which sought to increase production to meet the requirements created by population growth and to increase income and employment in rural areas. In addition, the objective supported the Bank Group's agricultural sector strategy, as defined in the 1993 CAS, to promote sustainable agricultural development in impoverished and environmentally vulnerable areas and increase and diversify agricultural production. The objectives of the project were clear and well-formulated. They were well designed, consistent with Borrower's and Bank Group's overall strategy at the time of preparation, and supported by the project's stakeholders.

3.2 Revised Objective: The original project objectives remained unchanged.

3.3 Original Components: The project design focused on the transformation of degraded wasteland and semi-wasteland into a productive, sustainable agricultural resource. It built largely on the experience gained under the first 'Red Soils Area Development Project' (Credit 1733-CHA) and centered around a comprehensive development of micro-watersheds with integrated land development, infrastructure, crop and livestock development, buildings, machinery, rural energy, research, training and TA. In addition to this watershed development part of the project, an agro-processing component was designed to utilize and add value to the output of farmers assisted by the project and to increase employment. Specifically, the project had the following 11 original components: (1) Land Development (costs including contingencies US$41.27 million - 13.9% of total). This component lays the foundation of the micro-watershed development by developing land both, on the slopes, mainly through terracing and soil conservation measures, and in the valleys, through the improvement of drainage of paddy fields. The component planned for 22,229 ha of new terrace development and 2,498 ha of terrace rehabilitation, including 21,647 ha of grass/soil conservation measures. In addition, 10,712 ha of paddy rehabilitation plus some bamboo and fishpond development were included.

(2) InfrastructureDevelopment (US$32.22 million - 10. 9%). This component was focusing on irrigation for both, upland fields and orchards and lowland paddy fields. The construction of storage facilities such as small reservoirs and ponds, as well as raising of small dams, pumping stations, distribution systems such as pipes and canals, and sprinkler are part of the construction plan. Specifically, the component included the improvement of about 10,700 ha of existing paddy land, and the provision of dry-season irrigation for about 23,700 ha of upland orchards, and fodder and other annual field crops. In addition to the irrigation infrastructure, the component aimed at meeting the additional power requirement for irrigation, agro-processing and domestic lighting by installing transmission lines, and at linking project sites to the existing network of paved country roads by constructing and upgrading about 1,036 km of all-weather gravel roads (class IV standards).

In September 2001, about SDR8.052 million of the Credit were allocated to a new 'Inner Mongolia Snowstorm Emergency Recovery Component' (IMSERC) (see Chapter 10). This Component is still under implementation and not part of this ICR.

- 2 - (3) Buildings (US$24.24 million - 8.2%). About 623,600 square meters of buildings (excluding those for agro-processing) were planned under this component. This included farmsteads for new settlers (22%), offices, workshops, storage and warehouses, and service and extension centers (16%), and buildings for pigs and other livestock (64%).

(4) Machinery and Vehicles (US$14.33 million - 4.8%). This component was designed to provide vehicles to supplement existing fleets to meet the expected demand for transporting project inputs and agricultural produce, including 204 trucks of 5- to 8-ton capacity, 304 trucks of 1.5- to 2-ton capacity and some insulated or refrigerated vans and milk tankers. The design also included the provision of small farm machinery such as two-wheel tractors and power pesticide foggers to specialized contractor households.

(5) Crop Establishment (US$92.80 million - 31.3%). This component was designed to provide complete crop establishments in all parts of the micro-watershed under development. About 16,464 ha of fruit trees were planned, most of which peach and plum, citrus (including rehabilitation), chestnut, and longan, lychee and ginkgo. This area was also used for inter-cropping at the early stage of implementation when trees were still sufficiently small. In addition, the component design included 3,353 ha planted to tea, mulberry or grapes, 10,712 ha of improved paddy on the drained fields in the valleys, 13,755 ha of forests (mostly Chinese fir and Masson pine), and 1,143 ha of bamboo, plus some seedling nurseries and crops establishment on up-land area.

(6) Livestock and Aquatic Development (US$43.74 million - 14.8%). The development of livestock and aquatic production is a crucial part of the comprehensive watershed development and was fully integrated with the other components by making the number of livestock supported by the project dependent on the requirements for animal manure in the development area and on the need to provide cash income for project farmers, in particular early in the project phase when tree crops do yet not provide yields. Specifically, the component planned the financing of 20,579 breeding pigs and about 410 thousand fattening pigs, about 210 thousand chicken and 236 thousand ducks and geese, and some 759 cows for specialized dairy households in Jiangxi and Zhejiang. In addition, 765 ha of new and 91 ha of rehabilitated fishponds were included.

(7) Rural Energy (US$2.87 million - 1.0%). Under this component the financing of 9,970 biodigesters and 24,540 improved stoves was planned in order to make efficient use of the animal manure produced under the project.

(8) Agro-processing (US$31.57 million - 10.7%). 18 agro-processing sub-projects were planned under this component, including seven fruit processing and one bamboo and fruit pulp plant, one tea plant, two cold stores, one cannery, one flavone plant, one silk weaving and one silk reeling plant, two feedmills, and one wholesale market. Financing plans included land, buildings, equipment, provision for waste treatment, vehicles, and about 3,781 person months of local training for workers and staff.

(9) Research (US$2.45 million - 0.8%). This component was designed to support research (including some research equipment) carried out by local research institutes and coordinated by the Technical Committees. Proposed topics included soil fertility, sustainable agricultural systems, watershed management including irrigation and water management, Integrated Pest Management (IPM), agro-forestry, orchard management and post-harvest treatment, animal husbandry and aquaculture.

(10) Training and TA (US$6.45 million - 2.2%). In order to build a stronger capacity for beneficiaries and project staff, this component provided support for local and overseas training, study tours, and institutional development TA comprising both foreign and local consultants. Specifically, about 40% of all participating households, and in particular women, were to be trained for a total of 20,255 person months. The component also included a total of 1,076 person months of training of agro-technical staff from townships and counties, 151 person months of higher level training, and 375 person months of long-term

-3 - domestic and 105 person months of long-term foreign training. Moreover, 211 person months of study tours and 118 months of TA were planned.

(11) Project Management (US$4.37 million - 1.5%). A project management structure was designed with implementation responsibility for the Governments of the participating provinces, guiding and supervising responsibility by Ministiy of Agriculture, and financial responsibility by Ministry of Finance. Project management included Project Leading Groups (PLGs) and Project Management Offices (PMOs) at central, provincial, city, county, and township level, and Technical Committees (TCs) at central, provincial, city, and county level. The components of the project were clearly linked to the objectives described above, and adequate for their achievements. They were well designed, building upon each other, and with detailed and practical technical standards. The relatively high degree of complexity of the project, which was necessary for a successful watershed development, took into account the capacity of project management. For this reason the implementing agency was a different institutional set-up than that in the precursor (first) Red Soils Area Development Project. 3.4 Revised Components: The design of the red soils area development was well prepared and remained largely unchanged throughout the implementation period (except for IMSERC, see Chapter 10). However, mainly due to favorable exchange rate developments, availability of project funds for implementation, in real terms, exceeded appraisal estimates substantially and the scope of the project was extended by increasing the number of project watersheds by 49 and expanding 16 out of the original 217 watersheds. Consequently, output indicators of all micro-watershed development components substantially exceed appraisal estimates. At the same time some smaller adjustments in the relative importance of components and activities took place, e.g. the increase in the share of citrus and the number of livestock and the reduction in mulberry trees, chestnuts, and some other sub-activities. While a number of agro-processing plants were cancelled during implementation, mainly due to changes in market conditions, the total costs of this component actually increased because of higher prices of construction works and equipment purchased and because of the expansion of those sub-projects that were implemented.

3.5 Quality at Entry: Quality at Entry is rated satisfactory, based on the strength of (i) consistency of project objective with the Bank's long-term strategies and the Government's policies for agricultural and rural development and poverty reduction; (ii) a project design which incorporated valuable lessons learned and experiences from other Bank-financed watershed development projects and, in particular, the first Red Soils Area Development Project, including a greater emphasize on risks management and project sustainability; (iii) innovative and sound project design including excellent technical specifications and a thorough economic analysis; (iv) strong Borrower ownership; and (v) the Bank's safeguard policies being adequately addressed in project design.

4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The project's objectives and outputs were substantially achieved. Agricultural production and productivity over a wide area of degraded red soils increased considerably. Household survey data indicates that the output value in real terms of participating farm households almost doubled from 1994 to 2000 and exceeded that of nonparticipating households by about 30% at the end of the implementation period. Before the project, paddy yields in the valleys of the small watersheds were very low and no production took place on the sloped areas; in 2000, crop yields in the project area exceeded

- 4 - those outside by more than 25% for most crops. The project further increased farmers' income and employment and alleviated poverty by directly improving the living standards of 68,373 beneficiary households or approximately 400,000 people. Given the expansion of the project area, the project could have benefited even more households. However, the figure exceeds the appraisal estimate (67,000 households). The average annual per-capita net income of these beneficiaries, measured in 2000 prices, increased substantially from about 1,200 Yuan in 1994 to about 2,450 Yuan at the end of the project; and this income also exceeded that of non-beneficiaries by about 20% (see Annex 1). Other measures of living standards were also improved, including access to training, information, transport, and other resources. Employment increased in virtually all beneficiary households and also beyond this group since the increased economic activity created employment outside the project area, in particular in the down-stream sectors. Women benefited substantially from the project. Their involvement in project activities was very high as the demand for their skills and labor in project implementation was great. In addition, some farmers in those villages from which beneficiaries moved into newly developed watersheds benefited indirectly by the freeing-up of resources. The overall financial and economic Net Present Value (NPV) of the project is positive (see Chapter 4.3), though less than the appraisal estimate, which is partly due to some output prices being lower than assumed at appraisal and the a severe frost in 1999/2000. The environmental impact of the project has also been very positive, primarily as a result of increased forest coverage and the successful introduction of soil and water conservation measures on slope land. Reduction in soil loss has been confirmed in the findings of Agro-Environmental Monitoring Stations in the project provinces, ranging from 24% in a sample watershed in Jiangxi to 78% in one in Guangxi (see Annex 1).

4.2 Outputs by components: (1) Land Development (US$44.8 million actual). The component is rated satisfactory. Achievement of physical targets is high; and the significance of sound land preparation practices for agricultural development has been widely recognized and adopted, even beyond the project area. About 25,750 ha of sloped land have been newly terraced and about 3,370 ha of terraces have been rehabilitated. These figures exceed the original plan by 15% and 23%, respectively. Additional soil conservation measures taken include the planting of vetiver grass, day lily or other deep-rooted plants to protect terrace lips from erosion. Generally, terracing and trenching have been executed satisfactorily. Other land development works include paddy rehabilitation, mainly drainage improvement (11,667 ha, 109% of SAR), construction of fishponds (202 ha, 231 % of SAR), and land development for bamboo (2,515 ha, 202% of SAR). (2) Infrastructure Development (US$36.9 million). The component is rated satisfactory. At project completion supplemental irrigation facilities have been provided for 37,457 ha, predominantly under orchards, exceeding appraisal target (34,417 ha) by 9%. The need to irrigate up-land orchards has been successfully introduced under the project and is now accepted as standard watershed development practice. This is a substantial achievement despite the fact that the performance of the irrigation systems, measured in terms of adequacy of water delivery and on-farm water distribution, varies among watersheds within and across provinces. Moreover, operation and maintenance including irrigation cost recovery was addressed during project implementation, and water charges appear sufficient to cover the cost of operation and maintenance. Roads constructed under the project total 1,465 kni, exceeding the appraisal target by 49%. (3) Buildings (US$31.7 million). The component is rated highly satisfactory. Some 860,000 square meters of building construction, comprising mainly farm housing and pig sheds, were completed under the project, 40% more than planned. Farm housing accounts for 23% and pig sheds for 63%. About 3,280 farm families, 50% more than estimated at appraisal, were settled in the watersheds, mostly in Jiangxi. Pig

- 5- sheds can accommodate over half-a-million pigs. Construction quality is generally good, with technical standards often exceeded. In some watersheds, larger structures such as warehouses and workshops were over-designed, and, consequently, are under-utilized. (4) Machinery and Vehicles (US$11.1 million). The component is rated satisfactory. 269 pick-up trucks and 185 trucks up to 8 tons of capacity (29 and 40 more than planned, respectively) as well as 116 motorcycles were financed by the project. While the pick-up trucks and the motorcycles were used mainly by the project management offices, most of the trucks, as well as about 1,130 hand-held tractors were purchased and operated by specialist contract households. Some of the smaller farm machinery planned under the project was not purchased. In summary, physical targets were largely met and the trucks and tractors provided valuable means for transportation and production, not only for the household(s) owning the vehicle, but also for neighboring farmers who contracted the services of these farmers. (5) Crop Establishment (US$92.7 million). The component is rated satisfactory. Almost all physical targets have been exceeded. About 20,768 ha of fruit trees have been established under the project, 26% more than planned at appraisal. Growth and vitality of most plantations are highly satisfactory. In fact, most fruit trees have generated yields earlier than expected at appraisal. In some orchards the tree populations are excessive and this is likely to shorten the productive life of the fruit trees. Another problem is that some areas planted with citrus or other sub-tropical fruits suffered severe frost damage in the winter of 1999/2000. However, considerable efforts have been undertaken to rehabilitate these plantations, including replanting worth US$4.2 million. Paddy yields on the improved lowland fields increased substantially. In many cases, the production cycle increased from one to two harvests. Other crop establishment activities include tea (1,504 ha new tea, 95% of SAR; and 579 ha tea rehabilitation, 127%), forests (15,280 ha, 111%) and bamboo (3,024 ha, 265%), orchard inter-cropping (17,124 ha, 122%), various annual crops on irrigated or non-irrigated upland (6,233 ha, 109%), and seedling nurseries (96 ha, 117%). (6) Livestock and Aquatic Development (US$49.6 million). The component is rated highly satisfactory. Physical targets have been exceeded substantially. Some initial reluctance regarding the stocking rate set under the project was quickly overcome. The economic benefits, especially important at the early implementation stage, as well as the very positive effect of manure to increase the organic content of degraded soils, has been widely recognized and integrated livestock and crop production is applied beyond the project areas. By the end of the project 578 thousand fattening pigs, 27 thousand breeding pigs, 748 thousand chicken, and 361 thousand geese and ducks have been financed, exceeding the original plan by 33% to 256% respectively.

(7) Rural Energy (US$3.1 million). The component is rated highly satisfactory. More than 12,000 biogas digesters and more than 27,700 improved stoves were financed under the project, exceeding SAR figures by 21% and 11%, respectively. The use of biogas digesters is a cheap and simple method of producing energy from renewable resources, leading to a cleaner environment and reduction of other energy sources. The component has successfully introduced the use of this technology on a large scale. (8) Agro-processing (US$45.0 million). The component is rated unsatisfactory. Of the 18 sub-projects planned at appraisal 4 were never realized, 5 were dropped after some initial investments, and 2 have suspended production, mainly because of strong market competition, a relatively small scale of operation and weak management. Of the remaining 7 sub-projects, only the Jinhua Frozen Fruits and Vegetables Plant in Zhejiang can be regarded as being entirely successful in terms of its economic profitability and its impact on local farmers. The Hangzhou wholesale market, though loss-making in previous years, is likely to become profitable, and has provided some additional market channel and information to beneficiary farmers. However, agricultural products from the project areas constitute only a very small part of the products traded in the market. The two feedmill sub-projects are only partially successful, running on only

- 6 - about half of their capacity. They are profitable but in a vulnerable financial position, and have limited impact on farmers. Yushan Silk Weaving Factory in Jiangxi faces serious problems in marketing their products and, despite having made some profits, is also in a vulnerable financial position. Finally, 2 plants are still not operational at implementation completion. (9) Research (US$1.8 million). The component is rated satisfactory. Research results were widely disseminated and the project has benefited from the introduction of improved varieties of citrus and other fruit resulting from the work carried out at provincial research institutes and plant breeding stations. The research results have become an important basis for the further sustainable development of red soils watersheds. (10) Training and TA (US$7.7 million). The component is rated satisfactory. Training represents a crucial element of the project, and considerable more domestic training and study tours have been financed under the project than originally planned. About 815 thousand person time of training at the farm, township, county, and provincial level were given in during the implementation period, about 47% higher than the SAR figure. Training has been highly valued by project farmers and staff.

(11) Project Management (US$4.4 million SAR - US$7.3 million actual). The component is rated satisfactory. Please refer to the discussion of the borrower's performaance in Section 7.

4.3 Net Present Value/Economic rate of return: The economic rate of return for the watershed development part of the project (Components I to 7, 9 and 10) is estimated at 19%. This is lower than the 24% estimated at appraisal, the main reasons for which are (i) substantial decline in some agricultural output prices, e.g. prices of lychee and longan plummeted by more than 40 percent in real terms, (ii) losses due to the frost damage of the 1999/2000 winter, and (iii) a substantial increase in labor costs, from 8 Yuan/day at SAR to 15 Yuan at ICR (2001 prices). Nevertheless, an economic return on the investments of 19% is still substantial. A comparison of ERRs by project province is shown below. Fujian Guangxi Hunan Jiangxi Zhejiang Total Project ERR at ICR 20% 18% 17% 19% 17% 19% ERR at SAR 25% 31% 19% 17% 24% 24%

Following the approach used at appraisal, the economnic analysis did not include the agro-processing component, which accounted for 13% percent of total project costs. However, separate economic analysis have been carried out for four out of five agro-enterprises which were operational at the end of project implementation. ERR vary between 10% for the Hangzhou Wholesale Market and 17% for the Jinhua Frozen Fruits and Vegetables Plant. These four enterprises account for 62% of all investments made under the component. The returns on those enterprises which have either suspended their production or have not yet entered into operation as well as that for Feedmill where no reliable data could be obtained, is difficult to quantify (30.6% of total), but the aggregate NPV is highly likely to be negative. Investments that were made into plants that were abandoned before completion did not generate any return (3.5% of total investments). ERR at ICR ERR at SAR Gannan Feedmill, Jiangxi 14% N.A Yushan Silk Weaving Plant, Jiangxi 14% N.A Jinhua Frozen Fruits and Vegetables Plant, Zhejiang 17% N.A Hangzhou Wholesale Market, Zhejiang 10% N.A

-7 - 4.4 Financialrate of return: The financial profitability of watershed development program is generally satisfactory at the household level, as shown by various crop budgets and activity models (see project files), and at aggregated provincial level as outlined in the table below. FRR values are lower than their SAR estimnates due to the reasons provided in Chapter 4.3, but still quite high. Fujian Guangxi Hunan Jiangxi Zhejiang FRR at ICR 16% 17% 16% 17% 16%°/ FRR at SAR 24% 31% 19% 17% 21%

The financial rate of return of the investments made under the agro-processing component is low. Of the 18 agro-processing sub-projects approved in 1994, 9 were dropped outright or after some initial investments. 2 enterprises stopped production due to unprofitable operations and financial difficulties and 2 others were not yet operational at the time of implementation completion. A financial analysis has been carried out for 4 of the remaining 5 sub-projects which are currently in operation have been calculated. The IRR is positive, ranging from 10% to 17%. However, the financial position of several enterprises is vulnerable. IRR at ICR IRR at SAR Gannan Feedmill, Jiangxi 14% 24% Yushan Silk Weaving Plant, Jiangxi 11% 20% Jinhua Frozen Fruits and Vegetables Plant, Zhejiang 17% 24% Hangzhou Wholesale Market, Zhejiang 10% 20%

4.5 Institutionaldevelopment impact: The institutional development impact of the project is positive and substantial. The project has also increased the institutional capacity of the various Government agencies involved in the comprehensive watershed development including Water Conservancy, Agriculture and Livestock Bureaus. Staff at all levels has acquired valuable experience in land use planning and implementation. The integrated watershed management approach has strengthened linkages among various Government agencies responsible for agricultural and rural development. Through the support of research as well as a substantial amount of training the project helped farmers to improve the management of their resources. Close linkages between farmers, agricultural extension worker and researchers were established. Institution building under the agro-processing component was generally ineffective with weak management and ownership structures in a number of enterprises. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Decline in major agricultural output prices. China continued its market liberalization throughout the project implementation period and most prices of agricultural commodities have been driven by market forces. The decline in international prices of major agricultural outputs, in particular those of fruits and meats, had a substantial negative influence on the project outcome. Natural disasters. Natural disasters including flooding and frost occurred during project implementation and affected implementation and outcome negatively. The exceptionally harsh frost in the winter of 1999/2000 had the most damaging impact. It caused widespread damage of citrus and other sub-tropical fruit trees and reduced yields significantly. Project implementation was somewhat delayed and project outcome was adversely affected in the short-run.

- 8 - 5.2 Factorsgenerally subject to government control: The influence of factors subject to government control has been largely positive. With its continuous market-oriented reforms, both at the macro- and at the sectoral level, the Government has provided a policy framework to support the development of household-based agriculture as promoted under the project. Government conmnitment to the project was high throughout the project and as is reflected in the establishment and maintenance of an efficient project management, including cooperation between different line agencies. The organization and administrative arrangements made for the project with PLGs and PMOs at each level from province to county, further supported by TCs at each level worked well and was a major factor in successful project implementation. Adverse effects from a comprehensive Government restructuring program were kept at a minimum as continuity of key project staff was generally maintained. The one major shortcoming was the scarcity of counterpart funds from some Govemment sources which had an adverse effect on implementation.

5.3 Factorsgenerally subject to implementing agency control: Project management was strong and the performance of the implementing agencies contributed substantially to successful project outcomes. The PMO system, often in close cooperation with many different line agencies, effectively supported participating households. There were some shortcomings with respect to project documentation such as the quality of maps and the attention paid to loan and other financial records. This resulted in some over-claiming of project funds in the early stages of project implementation (subsequently resolved), and to slower progress in collection of repayments from beneficiaries. Nevertheless, overall the implementing agencies have to be commended for their performance; in particular, given the challenge of managing this project in many locations dispersed over five provinces.

5.4 Costs andfinancing: Actual project costs are US$336.0 million. This is about US$39.6 million or 13% more than the US$296.4 million estimated in the SAR. IDA's share of project costs was US$139.7 million compared with US$150 million at SAR. The reduced commitment of IDA funds resulted from a number of factors. A substantial amount of goods under ICB (with an IDA disbursement share of 100%) were not procured. In addition, the effect of the devaluation of the RMB from about 5.8Y/US$ at appraisal to 8.3Y/US$ at the beginning of project implementation in 1994 was greater than the price increases anticipated at appraisal. This resulted in a substantial increase of IDA funds in RMB ternns. More watersheds could be developed with the same IDA funds in US$ terms and consequently an equivalent of US$10.2 million was reallocated to a new IMSERC (see Chapter 10). While the amount of counterpart funds was increased substantially, the additional funds mainly came from the project beneficiaries whose share in total project costs increased from 16% at appraisal to 30%. Farmers' own funds for project implementation comprise family and hired labor and some purchased input. In particular, the cost of labor increased substantially leading to an increase in farmers' contribution. Moreover, the accounting of counterpart funds such as farmer's contribution is difficult and in some cases counterpart funds may have been overestimated.

6. Sustainability 6.1 Rationalefor sustainabilityrating: Project sustainability is highly likely. The project supported the development of unused, and often barren, red soils into a productive agricultural resource and pursued the strategy to improve farmers' income with diversified crop and livestock production. The careful selection of participating households, the application of comprehensive technical standards and adequate training, and the provision for operation and

- 9- maintenance for irrigation and drainage facilities including farmers' involvement in water management are important factors contributing to a high probability that the project achievements will be maintained and even increased with further tree crops growth. The sustainability of the project would be reinforced by the issuance of long-term land-use contracts to the beneficiaries and the continuation of the Government's commitment to the project. Given the measures taken and technologies adopted, the project has also proven to have sustainable environmental benefits, most importantly the improved soil fertility, reduced soil erosion, improved water availability, and increased forest coverage. All these features are highly likely to be sustained given the understanding of the farner beneficiaries and their economic incentives. The sustainability of the agro-processing component is less certain with some enterprises not yet into production and where progress in strengthening management through further privatization is not yet assured.

6.2 Transition arrangementto regularoperations: The Government is committed to take full advantage of the potential of the Project and arrangements for future project management have been made with responsibilities assigned to the relevant line agencies or commercial entities. Detailed plans for future operation include: (i) continued applied research in project watershed and continued training to beneficiary households, including on pest management issues; (ii) assistance to beneficiaries in marketing through provision of price and quality information and facilitation of formation of marketing groups; (iii) support in the establishment of institutions for self-managed infrastructure and other works; (vi) improvement of irrigation and other works where such works have not been constructed up to the optimal standard; (v) improvement of project documentation, including maps and financial records, and continued monitoring and evaluation of the project; and (vi) ensure cost recovery. Management of agro-processing enterprises, presently under Government management, would be strengthened through greater private sector involvement.

7. Bank and Borrower Performance Bank 7. 1 Lending: Overall performance, including identification, assistance in preparation, and appraisal is rated satisfactory. The Bank's input in terms of staffing and skill-mix was adequate. The Project identified was consistent with the Government's and the Bank's strategies to develop environmentally sustainable agriculture, increase employment and income, and help alleviate poverty. It built on the successes of the first Red Soils Area Development Project, and took the concept further by planning an integrated, sustainable development of entire (micro-)watersheds. The Bank also provided valuable assistance to the borrower in its substantial preparation efforts. Between identification and appraisal, 4 comprehensive missions with 5 to 9 members were sent to assist the borrower in project preparation. The missions included the following specialists: agriculture, economic analysis, rural credit, environment, agro-industry, project operations, water resources, and land-use planning. Technically, the Project was very well prepared with detailed feasibility studies for 30 watersheds and all agro-processing sub-projects and studies assessing environmental impact and project-relevant issues such as, among others, frost risks and marketing. Close attention was also paid at an early stage to ensure sound Project management. The Bank's performance at appraisal was also satisfactory. The Bank's team was a nine-member mission which reflected the comprehensive skill-mix used during preparation and included also a marketing and a procurement specialist. The appraisal itself was comprehensive covering all necessary areas including governnent commitment (including financial commitment) and capacity, project risks, the technical design, safeguard issues (environment, resettlement, dam safety), and procurement and financial management. The economic analysis for the Project was very sound. In retrospect, the one significant shortcoming in

- 10- preparation and appraisal was the overestimation of the management capability of publicly owned and operated agro-processing enterprises.

7.2 Supervision: The Bank's supervision quality is rated satisfactory. Size and frequency of supervision missions must be regarded as low for a project as large, complex and wide-spread as this one and more regular advice might have lead to improved implementation. Only 9 full supervision missions with on average 3.5 members took place over 7 years of project implementation. Given the resources, the composition of the missions was appropriate, and staff continuity was well maintained despite the long implementation period. The task team managed to identify and address implementation problems in an active and flexible manner, the advice given to the implementing agency was constructive and highly valued, and follow-up action was effective in solving the problems. Cooperation between the Bank and the borrower during implementation was close. While the project would have benefited from a more detailed documentation of implementation, performance ratings were generally realistic and adequate attention was paid to legal covenants and safeguards.

7.3 Overall Bank performance: The overall Bank performance is rated satisfactory. Project objectives were relevant to the country's needs and in line with Government and Bank development priorities and strategies; project preparation and appraisal were sound; and project supervision, though less than desirable, identified major issues and provided effective implementation support.

Borrower 7.4 Preparation: Project preparation by the borrower was satisfactory. The lessons and experiences from the first Red Soils Area Development Project were adequately incorporated into the project design (see Section 3.5). All major technical, institutional, economic and environmental aspects were addressed in a sound manner. While a fully participatory approach to preparation should have had greater involvement of farmers, their needs were taken into account, and the views of all stakeholders at central, provincial and local level were taken into account. The Government committed substantial resources to the preparation efforts leading to a sound preparation of the relatively complex, comprehensive watershed development approach. As part of preparation, criteria for site selection were established, detailed designs were made for 30 watersheds and all agro-processing sub-projects, and implementation arrangements were elaborated. Moreover, cooperation between the Government and the Bank was close and the Bank's advice was well reflected in the final project design.

7.5 Government implementation performance: The Government implementation perfornance is rated satisfactory. As discussed in Section 5.2, the Government provided the basis for the development of private agriculture as promoted under the Project with its ongoing market-oriented reformns, both at the macro- and at the sectoral level, throughout the Project implementation period. The commitment to agricultural development, poverty reduction, and environmental objectives was high. This is reflected in the Government's overall policy, administrative, and technical support. Moreover, PMOs at all levels were adequately maintained with trained and capable staff of various specialties. Staff continuity was generally ensured despite the overall Governnent restructuring. A shortcoming of the Government's implementation performance was that Government counterpart funding was not always provided in a sufficient and timely manner.

7 6 implementing Agency: The performance of the implementation agency is rated satisfactory. PMOs were overall adequately staffed, both in terms of skills, training, and size and Project management was overall very effective.

- 11 - Consequently, the quite time-consuming implementation process of this relatively complex and widespread Project was accomplished almost within the time planned at appraisal, even though the project got expanded substantially. Substantial technical knowledge was available and this capacity, in particular, still increased over the course of the Project. Despite some shortcomings to carry out ICB procedures, procurement was also satisfactory. However, an improved quality of documentation and record keeping and a greater emphasize on financial management would have strengthened project management and better facilitate the repayment of funds from the beneficiaries.

7.7 Overall Borrower performance: The overall borrower's performance is rated satisfactory. The Government and the implementing agency have been committed to the project since its very beginning, and shortcomings in terms of counterpart funds or some other aspects of project management are minor compared to the overall effective management of the project.

8. Lessons Learned The project has demonstrated the feasibility of a comprehensive development of small watersheds, integrating crop and livestock, as a means to rehabilitate largely abandoned and infertile soils. The model developed under the project can be further refined for wider application on large areas of similarly under-utilized red soils in Southern China. A project management structure that is embedded in the existing line agencies rather than a project-specific management structure, as was done under the first Red Soils Area Development Project, is more likely to assure long-term sustainability of project achievements. Building up the fertility of degraded red soils takes several years and requires large quantities of animal manure, green manure, and crop residues which are not readily available at the start of the development process and need to be accumulated by increasing livestock production and annual cropping in the initial years of implementation. Important factors contributing to the success of the project are: (i) the development and application of comprehensive technical standards; (ii) adequate training of both project staff and farmers, particularly during the early years of the project; (iii) the selection of capable and highly motivated beneficiaries; and (iv) the timely availability of counterpart funding, which is particularly crucial for the implementation of common goods such as irrigation, drainage and roads. During the first two years of the project the implementation of land development, crop establishment and irrigation was too rapid and resulted in poorly executed works in some areas. This shows that the speed of implementation should be in line with the capacity of project management staff and farners. The need for diversification of production was already learnt from the first Red Soils Area Development Project and was addressed in the design of this project. Considerable success has been achieved under the project in diversifying orchard crops with deciduous fruits such as plum, pear and peach as well as various citrus varieties and lychee, longan, and loquat. The serious frost damage which occurred in the winter of 1999/2000 underlines the need to minimize the risk of weather-related crop-damage. Farmers should be encouraged to diversify orchard cropping and pay attention to the site selection of frost-susceptible crops. The volatility of agricultural market prices during project implementation underlines the need for sufficient diversification of crop and livestock production. At the same time, the marketing of production, in particular of high-value fruit output, requires strengthening of market informnation systems and assistance to growers in setting-up marketing groups.

- 12- Investments into small and medium-sized agro-processing enterprises which are Govenmment-owned and operated have generally been unsuccessful. By contrast, the project has shown that the involvement of the private sector through joint-ventures or buy-outs has provided a much-needed injection in management skills and working capital, which has resulted in efficient and profitable enterprises.

9. Partner Comments (a) Borrower/implementingagency: Comments from CPMO

We believe the assessment of the project in the ICR generally reflects the actual situation of the project and we appreciated very much for the efforts made by all of the ICR mission members. Here, we wanted to emphasize some aspects of the project.

The design of this project, which takes watershed as a basic unit for development, is very successful and will be valuable for other similar projects to follow.

We are satisfied with the assessment made on achievement of project objectives and outputs in ICR. The project has really achieved a lot of benefits especially the social and ecological benefits such as poverty alleviated, fanning practice changed, farmers' living conditions and environment improved.

We are also satisfied with the assessment made on economical and financial rates of return in ICR. The figure was lower than that of SAR and we think the main reason for it was the substantial decline of the project output price and the unusual disasters occurred in project area.

We agreed the analysis made on the Agro-processing plants in ICR. This component is not successful because of decline of the output price, weak management, strong competition in the market and time-consuming ICB procurement procedure. (b) Cofinanciers: n.a. (c) Otherpartners(NGOs/private sector): n.a.

10. Additional Information A. Inner Mongolia Snowstorm Emergency Recovery Component The amount of IDA financing used for the Second Red Soils Area Development Project was less than appraisal. This reduction in costs stems from a more favorable exchange rate than estimated at project appraisal, and from less ICB than estimated and beneficiaries purchasing certain inputs used under the project themselves. The red soils development used some of these funds by increasing the project scope: 16 of the original 217 watersheds were expanded, and another 49 added. In addition, the Borrower and IDA agreed in 2001 to use other cost savings for a new 'Inner Mongolia Snowstorm Emergency Recovery Component' (IMSERC), an operation beyond the original project objective and outside the red soils provinces. The component has the objectives to restore social and economic infrastructure critical to the lives of nomadic herders devastated by an unusually severe snowstorm in hard hit areas of Inner Mongolia and to enhance and strengthen the disaster response capacity of the local government and affected herders." The credit amount of Jiangxi, Zhejiang and Fujian was

- 13 - decreased by SDR3.095 million, SDR3.102 million and SDR3.528 million, respectively, while the credit amount of Guangxi was increased SDRI.683 million. The net amount available from this reallocation, SDR8.052 million, was reallocated to the new component. IMSERC became effective on September 24, 2001, shortly before the closing of the Credit Categories for the red soils development. It is sill under implementation and not part of this ICR. IMSERC will be evaluated after its completion in a separate document.

- 14 - B. List of Watersheds by Province and County

Fujian Province

Xin Luo County Sha Xian County You Xi County I Nan Zhuo 37 Hou Di 73 Yu Chi 2 Xin Ci 38 Chun Wei 74 Hou Lou 3 Hu Ying 39 Shan Kou 75 Chang Hua 4 Chang Ken 40 Hun Gan Qu 76 Liu Tan 5 Shan Qian 41 Tong Meng 77 LiangHua' 6 Da He 42 Lian Ko Zhu Yuan 78 JiHou Shang Hang County Jiang Le County Song Xi County 7 Ping Pu 43 Xi Tian 79 Deng Shan 8 Jiao Long 44 Wu Shi Ken 80 Zhang Dun 9 Ji Dang Shan 45 Tu Di Gong Long 81 Zhi Long 10 Huang Ken Ping He County 82 Liu Dun Wu Ping County 46 Bao Qiao 3 Guan lou 11 Wu Li 47 Wen Mei Zheng He County 12 Shi Bo Ken 48 Nan Shan 84 Zhang Tian Yang 13 Xiao Xin 49 Bei Ken 85 Da Ken Xi 14 Yuan Ding 50 Pingle' 86 Hui Long Shi 15 Da Keng Wei" 87 Da Xi Yang Shung Chang County 88 Fan Sheng Long Zhang Ping County 51 Dong Yuan 89 Kai ping li 16 Xi Zi Kou 52 You Yuan 17 Qing Yuan 53 Sa Ken long Pu Cheng County 18 Xi Ken 54 Da Long 90 San Guan Zai 19 Cai Meng 55 Da Di 91 Fu Hu 92 Tong Yuan Yong Ding County Lang Jing County 93 Ken Yan 20 Dong Xin 56 Kui Shan 21 Que Ping 57 Xi Dong Zhao An County 22 Jin Zhu Xi 58 Zhu Yuan 94 Jian Shan 23 Wu Shi Dong 59 Hong Ken 95 Bei Tou Ling 24 Jiang Jun Yang 60 Dao Long Tou 96 Shang Bei Ling 61 Da Ken Tou 97 Zhan An' 25 You PingC 62 Jian Shangn Ning De City 26 Xia Jiang Yan Ping County 98 Ba Du Ming Keng 27 Da Tang Wei' 63 Dong Shan 99 Jing Hang Ting Ping 28 Yang Bai" 64 Da Yuan 100 Si Hou Shang Wang' 65 Hai ShanIO1ZagWnLiDn Chang Ting County 66 Chan Lin Ke 101 Zhang Wan Lei Dong 29 Da Chou Ping 67 Da Yan Qian 102 Fu An Su Yan 30 Guang Fang" Wu Yi Shan County 103 Fu AnXi Ping' 31 ShiYang Yan 68 Nan Shu 104 Fu AnXu Jian 69 Yan Zi Ke 105 Xia PuNan Ping Shao Wu County 70 Song Yang 106 Xia Pu Chuang Lu 32 Wu Jian Tan 10 P, 33 Shuan Xi Min Hou City 107 Ping Nan Ci wan' 34 Hong Dun 71 Bei Sa Tang Ju1 35 Na Kou 72 Zu Zi Chuan Fen' 109 Fu Ding Ri Ao0 36 Xie Fang 110 Fu Ding Lan Ting' Guangxi Autonomous Region

Quanzhou County Fuchuan County Beiliu County I Ln Yuan 8 Huang Long 15 Na Pai 16 Da Peng Xinan County Chongzuo County 17 Ma Chang Keng 2 Huang Jin Chong 9 Long Tan Linchuan County Tianyang County Luchuan County 3 Chai Gang 10 Gan Shang 18 Jing Dong Lingui County Guiping County Fangcheng County 4 Wu Hua Ping 11 Cha Hua Chong County 19 Han Xiang Yong'an County 12 Shuang Luo 20 Long Meng 5 Mian Mu Gout Pingnan County Shangsi County 13 Shu Mo He 21 Tang Ma Gangbai County 6 Yu Liang Ping Liujiang County Zhongshan County 7 Si Zi He 14 Hun Shui He 22 Xi Niu Zhai

Hunan Province

Zixing County County 1 Pingshihe 19 Zhanjia 36 Gaoshanwang 2 Dashian 20 Litang 37 Meitang 3 Shaoxianting 21 Daotang 38 Longhaitan' Daoxian 4 Tangwei 22 Cenjiangdu 39 Tiejiahu 5 Xinche 23 Dapingpu 40 Luotoushan 6 Niupoao' 24 Xiangshiping 41 Fucha7 7 Jiujia 25 Shengrenshan 42 Qingshuitang 8 Youtang 26 Maocaoli 43 Yingnan 27 Baixianggang County 9 Dongling 44 Wangzi 10 Daping 28 Shimazhai 45 Dongsheng Jianghua County 29 Shijiaqiao 46 Maxin 11 Niuguling Zhishan County Changning County 12 Shuangshiqiao 30 Dianweitou' 47 Tashan 13Maopingpu' 31 Yongxingqiao 48 Leibeichong Guidong County Xintian County 14 Gankeng 32 Maanshan' 49 Dongmaolong 15 Tongluo Huilongxu County 50 Gaoli Lengshuitan County 33 Shuanglong 16 Maping 34 Mashann 51 Zhengjialing 17 Wuliping 52 Shuanglongxing 18 Jiepailing 53 Huangjia' 35 Sanxing

- 16- Jiangxi Province

Dayu County Guixi County County 1 Xin Jiang 20 Qiaotouling 35 Liantang 2 Chang Keng 21 Yangmeiling 36 Guifeng 3 Xi Shan' 22 Danao 37 Xili' Nankang County Chongren County Yushan County 4 Li Jia Shan' 23 Sixia 38 Zaiqian 5 Jin Ji Jinxi County 40 Changgeng 6 Lou Bei' 24 Tianzike Xinfeng County 25 Zhongling' Wannian County 41 Yagang 7 Chang Gan Linchuan County 42 Dongjiangfeng 8 Xi Niu 26 Zhongma 43 Zhongxinling 9 Xin Chang Xinjian County Yongxiu County Wanzai County 27 Guanshan 44 Cheqiao 10 Tai Xi Nancheng County 45 Maoshanlong II Jin Xi 28 Oufang 46 Mazhou 12 Bei Shuihe 29 Longyou 47 Changxing 13 Yi Si' 48 Zhangjiashan' 14 Chi Bi' Shangrao City48Zagihn 15 Shuangjin 30 Qiuhuli Jinxian County 31 Menghe 49 Lishan' Xiajiang County 32 Wangbigang 50 Zhangwangmiao 16 Bu Tou 33 Wuliling DnxagCut 17 Huang Zhou 34 Changling 51 Leigongling 18 Mao Ping 1Lignln 19 Nan Yang 52 Yuanshanggan Zhejiang Province

Anji County Longyou County Jiangshan County I Huang Ni Ling 11 Zhixi 21 Guangtoushan 2 Huang Du .. 22 Shangzhoushan 3 Qing Shi Shan Pujiang County 23 Shantouxi Changshan County 13 Yanjiashan Wuyi County 4 Wu Gu Tang Quzhou County 24 Dongwu 5 Hu Dong 4 25 Shilongtou Changing County 15 Shangtianpu 26 Shuanglian 6 Dong Shan Gang 16 Xifangzhang Yongkang County 7 Shi Gu Gang 17 Qingshui 27 Shuiduitou 8 Su Zi Ling Jinhua County 28 Shixi Dongyang County 18 Fangxiadian Yiwu County 9 Chang Song Gang 19 Chisong 29 Chengbei 10 Dong Bai Shan 20 Quankou

e - original watersheds which were expanded during implementation. n - watersheds newly added during implementation.

- 17 - C. List of Research Topics by Province

Fujian Province Construction of demonstration area about watershed, orchard, and paddy Effects of organic fertilizer application in different soils Trace element demand of different soils Fertilizer application in orchard and intercrops Variety selection for trees, fodder, and corn Water and soil conservation Forest plantations in waste lands Impact of organic and chemical fertilizers on various soils Introduction of fodder varieties High yield orchard management None-pollution agriculture

Guangxi Province Fertilization technique study for longan Fertilization technique study for gingko Natural resource and its dynamic change on red soil development areas Soil fertilization and management techniques on new orchard in red soil areas Conservation of soil and water on new orchard on sloped red soils Application techniques of long-term releasing nitrogen fertilizer for longan Ecological control approach of methane generation and release in paddy field Promotion, control and protection techniques for mango flower Monitoring and evaluation of soil erosion in red soil development areas Impact of agro-chemical application on the agro-environment in red soil areas High yield and efficient solid cultivation in red soil orchards Investigation of red soil development and ecological environment index systemn Nutrition diagnostic for gingko Survey and analysis for gingko yellowing Nutrition diagnostic for longan Major longan pests prevention and curing techniques Normal temperature preservation techniques for mango and longan Juice processing for gingko and persimmon Development of natural resources on red soils Substance and energy transformnation in ecological systems of small watershed Establishment of high-yield longan orchards on red soils Selection of development models for red soil areas Development and application of potassium-rich green manure Irrigation techniques on major sub-tropical fruit trees

Hunan Sustainable watershed agro-development and treatment Treatment of soil erosion in red soils areas Breeding of new citrus varieties and prevention of frost damage and frost damage recovery Techniques for net fishing Technology of upgrading the quality of canned food Design and planning techniques for soil treatment and agriculture in comprehensive red soils development

- 18 - Jiangxi Province Environmental monitoring and evaluation for development and administration of watersheds Ecological benefits of orchard-livestock-fishery patterns Introduction of improved variety of crops and high yield High-quality and high-yield navel oranges on red soils Experimentation with grasses for erosion prevention of sandy soils Special poultry breeding, high yields and efficiency Dissemination and demonstration of "Jiamu" liquid fertilizer technology Introducing improved variety of crops and high quality and yield, research on disposal of fruits

Zhejiang Province Watershed design Watershed development Project monitoring and evaluation Compound fertilizer application Adaptability of fruit and fodder varieties in red soil areas Water resources utilization

-19- D. Agro-processing Component Table: Total investment and ownership by sub-project

Total IDA share (%) Ownership (1000US$) I Gannan Feedmill 4,841 60% state 2 Yushan Silk Weaving Plant 929 38% state 3 Shanghang Plum Beverage Plant 2,664 65% state 4 Shaxian Canned Bamboo Plant 181 57% cancelled 5 Jiangle Silk Reeling Mill 0 - cancelled 6 Wuishan Tea Plant 437 42% cancelled 7 Songxi Plum Factory 341 41% cancelled 8 Jianou Fruit Cool Store 628 95% cancelled 9 Zhangzhou Cold Store 0 - cancelled 10 Lingling Fruit Juice Plant 1,189 60% state 11 Hengyang Feedmill 1,682 54% privatized 12 Cannery 0 - cancelled 13 Lingchuan Flavone Plant 0 - cancelled 14 Guigang and Beiliu Fruit Drink Plants 5,009 72% state, contracted to private 15 Chongzou Tropical Juice Plant 4,911 59% state, contracted to private 16 Jinhua Frozen Vegetable prod. 6,111 62% privatized 17 Changshan Fruit Juice Plant 0 - cancelled 18 Hangzhou Wholesale Market 16,150 9% state TOTAL 44,952 43%

- 20 - Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators: Indicator/Matrix Projected In last PSR Actual/Latest Estimate Agrcultural output (1) 30% Farm income (2) 21% Poverty (3) 5% and below 5% and below Women employment (4) 9%-32% Redudion in soils erosion (5) 24%-78% Outcome/impact indicators were not clearly defined in the SAR and were not reflected in the Bank's project documentation. For the purpose of this ICR, the following impact indicators are reported to reflect the achievements of the Project objective: (1) Percentage of agricultural output value of project beneficiaries exceeding that of non-participating households (in 2000). (2) Income of project beneficiaries exceeding that of non-participating households (in 2000). (3) Poverty share in project area (in 2000); baseline (1994) figures range from 14% in Zhejiang to 30% in Guangxi. (4) Percentage points of women employment share in project areas above share in non-project area (in 2000). (5) Percentage of reduction in soil run-off coefficient in project areas compared to non-project (in 2001). The figures are based on the household surveys carried out annually in each province (1-4) and agro-environmental research in sample watersheds in Jiangxi, Hunan and Guangxi (5).

Output Indicators: Indicator/Matrix Projected In last PSR Actual/Latest Estimate New terraces (SAR: 22,229 ha) 25,590 ha Terrace rehabilitation (SAR 2,498 ha) 4,467 ha Paddy rehabilitation (SAR 10,712 ha) 11,666 ha Irrigation (SAR: 34,417 ha) 37,457 ha New &up-graded roads (SAR 980 kmn) 1,464 km Buildings (SAR: 614,000 m2) 860,000 m2 Pick-up and othertrucks (SAR: 443) 454 Handheld tractors (SAR: 1,139) 1,130 Fruit orchards (SAR: 16,464 ha) 20,760ha Forests (SAR: 13,755 ha) 15,280 ha Breeding Pis (SAR: 20,579) 27,297 Fattening Pigs (SAR:410,327) 587245 Poultry (SAR: 446,000) 1,259,000 Biodigesters (SAR: 9,970) 12,038 Training (SAR: 660,000 person/day) 721,000 persornday)

End of project

- 21 - Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Project Cost By Component US$ million US$ million Land development 37.40 44.79 119.8 Infrastructure development 29.80 36.87 123.7 Buildings 21.80 31.73 145.5 Machinery and vehicles 13.40 11.09 82.7 Crop establishment 83.70 96.91 115.8 Livestock development 39.40 49.64 126 Rural energy 2.50 3.11 124.3 Agro-processing 28.60 45.02 157.4 Research 2.30 1.85 80.3 Training and TA 5.80 7.70 132.8 Project Management 4.00 7.31 182.7 Total Baseline Cost 268.70 336.02 Physical Contingencies 17.90 Price Contingencies 9.90 Total Project Costs 296.50 336.02 Total Financing Required 296.50 336.02 This column for 'Actual/Latest Estimate' table excludes IMSERC with an estimated cost of US$15.7 million.

Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) Procurement Method Expenditure Category ICB NCB Other2 N.B.F. Total Cost 1. Works 0.00 11.10 66.20 0.00 77.30 (0.00) (5.50) (20.30) (0.00) (25.80) 2. Goods 46.30 22.20 69.70 44.90 183.10 (46.30) (22.20) (47.20) (0.00) (115.70) 3. Services 0.00 0.00 8.40 0.00 8.40 (0.00) (0.00) (7.40) (0.00) (7.40) 4. Miscellaneous 0.00 0.00 3.80 23.80 27.60 (0.00) (0.00) (I .10) (0.00) (1.10) Total 46.30 33.30 148.10 68.70 296.40 (46.30) (27.70) (76.00) (0.00) (150.00) This table excludes costs for IMSERC. All figures include contingencies. At the time of appraisal, LCB (Local Competitive Bidding) was the procurement method corresponding to NCB, this is stated in the second column.

-22 - Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) Procurement Method Expenditure Category ICB NCB Other N.B.F. Total Cost

1. Works 0.00 0.86 51.64 0.00 52.50 (0.00) (0.61) (22.07) (0.00) (22.68) 2. Goods 34.10 43.34 97.56 50.50 225.50 (34.10) (32.51) (40.75) (0.00) (107.36) 3. Services 0.00 0.00 10.20 0.00 10.20 (0.00) (0.00) (8.08) (0.00) (8.08) 4. Miscellaneous 0.00 0.00 4.50 43.31 47.81 (0.00) (0.00) (1.56) (0.00) (1.56) Total 34.10 44.20 163.90 93.81 336.01 (34.10) (33.12) (72.46) (0.00) (139.68) This table excludes costs for IMSERC. "Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies. 2 Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local govemment units.

Project Financing by C omponent (in US$ million equivalent) Percentage of Appraisal Component Appraisal Estimate Actual/Latest Estimate IDA Govt. CoF. IDA Govt. CoF. IDA Govt. CoF. Land development 17.33 23.94 0.00 15.23 29.56 87.9 123.5 0.0 Infrastructure 19.13 13.09 0.00 16.01 20.86 83.7 159.4 0.0 development Buildings 14.48 9.76 0.00 13.77 17.96 95.1 184.0 0.0 Machinery & vehicles 10.66 3.67 0.00 8.45 2.64 79.3 71.9 0.0 Crop establishment 40.36 52.44 0.00 36.45 60.45 90.3 115.3 0.0 Livestock development 22.46 21.28 0.00 20.48 29.16 91.2 137.0 0.0 Rural energy 1.46 1.41 0.00 1.12 1.99 76.7 141.1 0.0 Agroprocessing 15.78 15.79 0.00 19.51 25.51 123.6 161.6 0.0 Research 1.38 1.07 0.00 0.82 1.03 59.4 96.3 0.0 Training and TA 5.05 1.40 0.00 6.10 1.61 120.8 115.0 0.0 Project Management 1.81 2.56 0.00 1.74 5.56 96.1 217.2 0.0 Total 150.00 146.40 0.00 139.67 196.34 93.1 134.1 0.0 Appraisal estimates include contingencies. Govt. includes fumds from all Government level, from ABC, and from beneficiaries.

- 23 - Annex 3. Economic Costs and Benefits Major economic benefits achieved by the project are the increase in agricultural production, farmers' income and rural employment through the rise of productivity and marketability of agriculture, horticulture, livestock, aquaculture and agro-industries in the project areas. These benefits have been quantified and compared to project costs following basically the methodology used for SAR. Data sources are actual costs from project records, actual production data and prices obtained from surveys and field visits, and up-dated estimates for future prices, yields, etc. based on discussions in the fields and estimates of expert from PMOs. Financial flows are converted to 2001 equivalent by applying the national CPI. Incremental costs and benefits for watershed development as a whole are estimated by comparing "with" and "without" project scenarios. For instance, for new cropland development, the entire costs of the components and all benefits are incremental as there are no crops produced in the "without" project situation and opportunity cost of the use of this land is assumed to be zero. New orchard investments covers land terracing, soil improvement, irrigation facilities and crop establishment. Apart from investment costs, incremental operation and maintenance costs including water charges for irrigation systems are all taken into account. In order to evaluate the watershed development, crop budgets and livestock activity models are developed for each of five project provinces to reflect the regional differences. The financial analysis uses actual market prices for inputs and outputs less transportation and handling costs to reflect farm-gate prices. For the economic analysis tradable farm inputs and outputs are valued at border (parity) prices. In the case of fruit, aquaculture products and live animals, which are technically tradable but actually sold in the domestic markets due to quality and trade restrictions, financial prices are used as proxies for economic prices. Similarly, no further adjustments are made for non-tradable farm inputs and outputs. In line with the Bank's recent analyses of agricultural projects of similar nature in China, a Standard Conversion Factor (SCF) of I is applied. This implies that no adjustments are needed for converting financial prices for non-tradables into economic prices. The province level FRR and ERR calculations take into account all incremental benefits and costs as they are arising according to the actual implementation progress achieved in each province. FRRJERR for the whole project is derived as the weighted average of the provincial FRRs/ERRs. In line with the SAR's approach, the economic analysis of the agro-processing component is undertaken separately. The analysis includes only enterprises which were operational at implementation completion. Sub-projects that were either cancelled, or dropped after some initial investments or have stopped production or are still not operational with limited information on their likely future available could not be included in the analysis. The economic and financial return of these investments is assumed to be very low. The calculations which are underaken are based on actual data provided by the management of the enterprises. Future revenues are derived from sales prices and the operating capacity achieved in past years. Tax expenditures are actual; in general, VAT is 17% with the amount paid to supplier's recoverable, and corporate income tax is 33% of taxable income, i.e. with depreciation taken into consideration. In theory, the IRR after tax and financing, which measures the return on the owner's equity (ROE), should be the real financial IRR to the owner. However, all enterprises were set up as state owned. Consequently, the distinction between debt and equity financing is blurred. Therefore, the return after tax is treated as FRR. Detailed calculations of the economic and financial analyses including crop budgets and activity models, as well as an assessment of each agro-processing sub-project, are provided in the project files.

- 24 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, I FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 11/90 5 RCS, E, ES, WRS, A 04/91 5 RCS, AG, OP, ES, WRS 03/92 7 E, A, PA, WRS, LPS, AG, ES 07/92 9 AG, ES, 2 E, A, WRS, LPS, PA, AIS 02/93 6 AG, E, ES, OP, A, E

Appraisal/Negotiation 07/93 9 AG, E, ES, OP, A, MS, E, APS, PS Supervision 05/94 1 AG HS S 02/95 4 AG, IE, A, APS S S 11/95 4 AG, A, APS, IE S S 03/96 1 APS S S 04/97 4 AG, AIS, IE, A S S 03/98 3 AG, AIS, IE S S 06/99 3 AG, IE, APS S S 03/00 4 AG, E, APS, IE S S 11/00 4 AG, E, IE, APS S S ICR 12/01 4 AG, E, IE, APS S S A = Agronomist LPS = Land Use Planning Specialist AG Agriculturist MS = Marketing Specialist AIS = Agro-Industry Specialist OP = Operations Officer APS = Agro-Processing Specialist PA = Project Analyst E = Economist PS = Procurement Specialist ES = Environmental Specialist RCS = Rural Credit Specialist IE = Irrigation Engineer WRS = Water Resources Specialist

(b) Staff

Stage of Project Cycle [ Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 239.30 452.40 Appraisal/Negotiation 62.50 215.30 Supervision 131.28 504.80 ICR 8.50 67.50 Total 441.58 1,240.00 Note: According to the Bank's accounting system, consultant staff weeks (excluding FAO/CP) are recorded only until Fiscal Year 1999. Input value includes all expenses, including consultant's input after Fiscal Year 1999.

- 25 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating D Macro policies O H OSUOM O N O NA L Sector Policies O H OSUOM O N O NA * Physical O H *SUOM O N O NA N Financial O H *SUOM O N O NA N InstitutionalDevelopment 0 H O SU O M 0 N 0 NA M Environmental O H * SU O M O N O NA

Social Z Poverty Reduction O H *SUOM O N O NA 0 Gender OH *SUOM O N O NA El Other (Please specify) O H OSUOM O N O NA S Privatesector development 0 H O SU O M 0 N 0 NA Li Public sector management 0 H O SU O M 0 N 0 NA L Other (Pleasespecify) O H OSUOM O N O NA

- 26 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bankperformance Rating

• Lending OHSOS OU OHU Z Supervision OHS OS OU 0 HU N Overall OHS OS OU OHU

6.2 Borrowerperformance Rating

• Preparation OHS *S O U O HU I Government implementation performance O HS O S O U O HU ? Implementation agency performance O HS O S 0 U 0 HU F Overall OHS OS O U O HU

-27 - Annex 7. List of Supporting Documents Aide Memoire of the ICR Mission Implementation Completion Report on Agroprocessing Component Financial and Economic Analysis: (i) FRR Calculation Tables by Province (ii) ERR Calculation Tables by Province (iii) Project ERR Calculation Table (iv) Financial & Economic Analysis of Agro-processing Component Beneficiary Household Surveys Sample report for agro-environmental monitoring from Hunan, Zhejing and Jiangxi Provinces Borrower's ICR Summary tables by province on (i) monitoring indicators, (ii) project costs and financing by source and component, (iii) physical progress, (iv) costs by procurement method, (v) costs by disbursement category, (vi) training, study tours, TA, and research, (vii) water charges by watershed, and (viii) list of dams subject to periodic safety instection.

- 28 - Additional Annex 8. Borrower's ICR Summary

Implementation Completion Report of China - Second Red Soils Area Development Project

I. Introduction 1.1 Project Background The success of the First Red Soils Area Development Project funded by the World Bank in red soils areas of Fujian and Jiangxi Province excited the World Bank's interest, and it was agreed to loan a new credit to develop red soils in southern China on a larger scale. The project was prepared by the Fujian, Jiangxi, Hunan, Zhejiang and Guangxi provinces and MOA at the beginning of 1990. The pre-appraisal was undertaken in March and finished in July by the World Bank in 1993. The Negotiation was finalized in December 1993. The Credit Agreement and the Project Agreement were signed between the People's Republic of China and the World Bank on March 23, 1994 and the agreement was set effective on 23 June in the same year. The proposed implemented duration was 6 years.

1.2 The Project Area The project areas are located in the south-east of China, extend from 20014' to 33009' north latitude and from 104°3 ' to 120043' east longitude. The landform is mainly hilly with elevations from 65m to 1000m. The soil types are mostly red soils, while some are crimson soils. The annual mean temperature varies from 160 to 200, the annual accumulated temperature is 55000 to 5800°, annual sunshine period is 1360 to 2119 hours and frost-free period is 241 to 31 Idays. The annual rainfall is 1100mm to 1900mm. Natural disasters include floods, droughts and frosts. The total population in the project area is 43 million, with a rural population of 38 million. The number of beneficiary households are 68 thousand and beneficiary farmers are 300 thousand.

1.3 Project Description China Second Red Soils Area Development Project (Credit No.: 2563-CHA) is based on the Development Credit Agreement between the People's Republic of China and the World Bank. The project implementation lasted 7 years from June 21, 1994 to Sept. 30, 2001. The appraised credit amount was 108.4 million SDR (about 150 million USD). The credit funds was onlent by MOF to the five provincial governments at annual interest rate of 5.38%, commitment fee of 0.5%. The annual onlending interest rate decreased to 2% after the year 2001. The repayment period is 20 years, and the grace period is 6 years. The CPMO established in Foreign Economic Cooperation Center of MOA and PPMO in five provinces were responsible for the project implementation. Project Leading Groups, Project Management Offices, and Project Science and Technologic Committees were set up at different levels. The project was designed to develop 217 watersheds with a total area of 52,500 ha and to build 19 agro-processing factories. The main contents included: 1. Land development; 2. Crop establishment; 3. Livestock and aquatic development; 4. Infrastructure; 5. Buildings; 6. Rural energy; 7. Machinery and vehicles; 8. Agricultural Processing; 9. Research and Training.

- 29 - During the mid-term amendment period in July 1997, the number of watersheds was increased from 217 to 266, and 16 watersheds were expanded in scale. The project contents in some watersheds were changed, area of citrus increased, scale of pig, sheep and chickens raising expanded, mulberry area and chestnut area reduced. Procurement of some goods and some agriculture processing plants were cancelled. The World Bank approved the proposal in June, 1999. In 2000, according to the progress of the project and the financial budget, the credit amount for Jiangxi, Zhejiang and Fujian was decreased by SDR 3.095 million, 3.102 million and 3.528 million, respectively. The credit amount of Guangxi was increased by SDR 1.683 million.

II. Objective, Design and Appraisal

2.1 Project Objective The project objective is to improve the ecological environment, develop the large degraded red soil areas in the south of China, promote agriculture production capacity and sustainable utilization of soils through improving the quality of the water and soil, reducing the soil erosion and changing farming practices, reduce poverty through increasing the income of the farmers who are not fully employed in rural areas and obtain better economic, social and ecology benefit.

2.2 Project Design The success of the Red Soil I project provided the experience and lessons for Red Soil II project: improving the soil by increasing application of the fertilizer, especially organic fertilizer; selecting capable farmers to take part in the project and establish the family farm; extending advanced and suitable technologies; combining the agriculture with stock raising to supply more organic fertilizer. The innovations of the Red Soil II project were as follows: The project was designed with watershed as unit for development; water and soil conservation strengthened; making full use of water resource in the watersheds was emphasized and long-distance water conveying abandoned; crop variety diversified; the demonstration effect stressed, extension and training of the new technology in project and non-project areas strengthened; agro-processing investments were focused on updating the existence equipment.

2.3 Appraisal of Project Design. 2.3.1 Six years of experience of project implementation proved that the design and the technical pathway of the project are practical and have the following advantages: 1. Taking watershed as the basic unit for development was very good for water and soils conservation and sustainable agricultural development; 2. Planting vetiver grass and hedges to protect the lips of terraces and increase ground cover to prevent soil erosion; 3. Application of more organic fertilizer and low-residue, highly effective pesticides to reduce pollution; 4. Good varieties and diversification of fruit crops to meet the requirements of market, increase economic benefits and overcome market risk; 5. Emphasizing the water balance in watershed and enhancing the irrigation facility construction to increase effectiveness of the irrigation system; 6. Strengthening research and extension of the new technology; 7. Combining the development of crop, animal raising and agro-processing to expand the production chain; 8. Developing forestry and bio-gas to increase renewable energy resources.

- 30 - 2.3.2 There are some shortcomings in the design and planning due to the lack of experience, the variation of watersheds and volatile markets, such as: 1. Estimated data were based only on typical watersheds and these watersheds were different from some other watersheds. This brought the unsuitability of some goods under international procurement; 2. Underestimate of the market and weather risks. Project products such as silk could not be sold well due to the sharp price decline in domestic markets, Longan and Lychee trees in some sites were damaged by frozen disaster; 3. Speed of development at the early stage was faster and the grade A of planting materials could not all be ensured; 4. Infrastructure investment was slightly higher; 5. Agro-processing plants took longer time from designing to operating. The products could not keep up with market change.

m. Achievement of Project Objective

3.1 Development of Watersheds 3.1.1. Land Development: The completed area of new and the rehabilitated terrace was 25590 and 3083 ha., accounting for 115.1% and 123.5% of the SAR target. The paddy rehabilitation was 11666 ha., accounting for 108.9% of the SAR target. The development of bamboo was 3063 ha., accounting for 246.4% of the SAR target. 3.1.2. Soil Conservation: The completed planting of the grass hedges was 58233 km, accounting for 185.8% of the SAR target. 3.1.3. Infrastructure: All the irrigation system was completed and the irrigated area was up to 37457 ha, accounting for 108.8% of the SAR target. Village roads Built/Upgraded 1464 km, buildings including farm housings, pig sheds, offices and extension center completed 860 thousand sqm, accounting for 149.4% and 141% of the SAR target separately. 53 meters long bridge and 219 concrete culverts completed, accounting for 176.7% and 128% of the SAR target respectively. 3.1.4. Crop Establishment. Fruit establishment completed 20767 ha accounting for 126% of the SAR target; mulberry and silkworm 488 ha, accounting for 43.6%; forests 15280 ha, accounting for 111%, orchard intercropping 17124 ha, accounting for 121.7%; improved paddy land 11136 ha, accounting for 104%; irrigated upland 5888 ha, accounting for 108.4% and seedling nursery 96 ha accounting for 117%. 3.1.5. Livestock and Aquatic Development. Breeding and fatting pigs are 27,297 and 587,245, accounting for 132.6% and 143.1% of the SAR target respectively. Poultry 1.11 million, dairy cattle 760, accounting for 248.6% and 101% of the SAR target separately. Fishpond built/improved 895 ha, accounting for 121.8% of the SAR target. 3.1.6. Rural Energy. 12,038 biogas digesters and 27,227 inproved stoves have been built, accounting for 120.7% and 111% of the SAR target respectively.

3.2 Goods Procurement Procurement of goods was basically consistent with the project design. Procurement methods included international and domestic bidding such as ICB, LCB, LS and so on. The goods procured included equipment, vehicles and materials. Equipment valued 23 million Yuan used for irrigation, construction, agriculture, research and training, accounting for 45.6% of the SAR target. The procured vehicles valued 76.376 million Yuan, accounting for 121.5% of the SAR target. Materials included construction materials, agricultural inputs and livestock/aquaculture

- 31 - inputs valued 1.48 billion Yuan, accounting for 134.5% of the SAR target. Because of the changing market, high procurement commission fee, complex procurement procedure taking a long time, the difficulties of the transport and delivery and the adjustment of the project contents, some of the goods were not procured, including Power pesticide foggers, fish pond aerators, feed processing machine, insulated vans, fish meal, amino acids, and some office equipment.

3.3 Research The 5 provinces have planned 56 research topics, 11 for Fujian, 8 for Jiangxi, 6 for Zhejiang, 6 for Hunan, 25 for Guangxi. The research topics covered the improvement of soils, fertilization, water and soil conservation; cultivation technology for fruit trees; pest and insects control; popularization of new varieties; models of red soil development; utilization of water resources; project monitoring and evaluation; and so on. All these topics were carried out by agricultural universities, agricultural technical institutes, forest technical institutes, and other research units in each province. All these topics were finished. Utilization of these results were widely used in the project area and helped the farmers on land developing, planting, management and establishing the eco-agriculture models.

3.4 Training The project conducted a lot of training, consulting and study tours during the project implementation. These activities promoted the capability of project official and technicians on project management and technology and were very helpful for project construction. 3.4.1 Domestic training: Farmers trained 895,831 person days. The subjects included cultivation technology, pest and insects control, livestock raising, aquiculture, water and soil conservation, land development, and marketing. Project officer and technicians trained 104,896 person days. The subjects included project design, project management, financial management, monitoring and evaluation, agricultural engineering, technical service and marketing. The domestic study tours completed 15,217 person days. 3.4.2 Overseas training and study tours: A total of 2,126 person days of overseas training and study tours were completed, mainly in the United States, Britain, France, Germany, Israel, and Japan on fruit cultivation and processing, environment protection, project monitoring and evaluation and so on.

3.5 Investment and Costs By June 2001, the project investment completed was 2.76 billion Yuan, accounting for 140% of the SAR target, including 97.33 million SDR (about RMB 1.1 billion Yuan) of IDA Credit, accounting for 89.8% of the SAR target. The domestic counterpart funds was 1.66 billion Yuan, accounting for 162.84% of the SAR target, of which 280 million Yuan was loan from ABC, 560 million Yuan from the government and the rest 820 million Yuan was farmers' contribution. The project costs by components were: Land development 370 million Yuan, accounting for 172.6% of the SAR target; Infrastructure 305 million Yuan, 178.3% of the SAR; Buildings 260 million Yuan, 209.7% of the SAR; Vehicles and machine 88.69 million Yuan, 115.2% of the SAR; Crop establishment 770 million Yuan, 160% of the SAR; Livestock and aquatic development 410 million Yuan, 181.4% of the SAR; Rural energy 25.72 million Yuan, 177.6% of

- 32 - the SAR; Agro-processing 370 million Yuan, 226.3% of the SAR; Research 15.3 million Yuan, 116.2% of the SAR; Training and study tours 63.76 million Yuan, 191.8% of the SAR. Project management fee 60.52 million Yuan, 266% of the SAR. Frost rehabilitation took 20.84 million Yuan.

3.6 Agro-processing plant The project planned to construct 18 agro-processing plants and 1 wholesale market. Most of the plants were cancelled because of changes of the market and economic conditions. At the end of June, 2001, there were 8 plants and I wholesale market left. Of these, 2 plants were under construction, 6 plants and the wholesale market had been completed and put into operation.

IV. Results of Project Implementation

4.1 Economic Benefit 4.1.1 Agricultural production capacity were increased Output of agricultural, livestock and aquatic products from the 266 watersheds developed in five provinces was greatly increased. At the end of 2000, production of the main products such as citrus, peach and plum, chestnut, lichee, longan, and paddy was 30% to 50% higher than that in non-project areas and had doubled compared to the yields measured before the project. 4.1.2 Financial analysis Financial analysis from the provinces showed the good economic benefits of the development of the watershed. The FRR was 18.26% in Fujian, 16.85% in Jiangxi, 17.94% in Hunan, 18.62% in Zhejiang, and 19.21% in Guangxi. The FRR was lower than SAR estimation because: I. The project cost increased as prices of project inputs increased. II. Prices and markets changed. III. Output prices decreased and the market became small for the project output products. This decreased the income to the project area. IV. The nature disaster caused much economic loss in the project area especially the frost happened in December, 1999. 4.1.3 Agro-processing subproject In general, most of the agro-processing subprojects did not meet the estimated target. Some plants were cancelled, some were completed but stopped production, some are using only half of their capacity. Economic benefit for these plants is not good except for Zhejiang Jinhua frozen fruit and vegetable plant. Main reasons were the market changed and the competition increased in the long period of implementation due to complex procedure of the procurement.

4.2 Social Benefit 4.2.1 Life of Farmers Improved According to statistics by the five provinces, net income of farmers in the project area in 2000 had increased by 3 to 4 times over that in 1994 (before project), 15% to 30% higher than non-project areas. Number of poor farm households below the poverty line decreased: before the project the proportion was 15% to 30%, but in 2000 the number was under 5%, in some watersheds, the poverty proportion was down to zero. 4.2.2 Employment Increased The project provided many jobs in the project area and promoted the development of related industries and increased the employment of labor forces, exploring a new way to transfer surplus labor in rural area.

- 33 - 4.2.3 Women's Position and Role Strengthened Large number of women attended technical training classes organized by the project to study the skills of animal raising, farming and courtyard-economy management, playing a more and more important role in family economic activities. 4.2.4 Transportation Improved The construction of the pathway in orchards and new/upgraded village road brought many conveniences to farmers in the project area.

4.3 Ecological Benefit 4.3.1 Increased vegetation cover, soil and water conservation. The development models combing the cropping of forestation and vegetation changed the traditional cultivation and formed an ecological agricultural system. Soil erosion was prevented efficiently. 4.3.2 27700 sets of fuel wood saving stoves and 12000 biogas digesters were build under the project. Agricultural waste were fully used to develop the biogas that alleviated the shortage of rural energy and cleaned the rural environment. 4.3.3 Sustainable use of land promoted. Combination of cropping and livestock raising promoted the sustainable use of land. Organic matter content of the soil in orchards increased by 0.5-0.6% from that before the project. 4.3.4 Impact on environment is positive The monitoring and evaluation on soil erosion, water quality, agro-chemical residue, treatment of waste water and exhaust gas showed that the project implementation had little negative impact on the environment, but positive. Environment benefits: improved soil fertility, reduced soil erosion, improved water quality and increased forest coverage.

V. Analysis on Major Factors Affecting the Project

5.1 Factors difficulty controlled by Government 5.1.1 Market and price "General Index Table of Agricultural Products Purchasing Price 1993-1999" showed that agri-products price in 1994 was the highest while that in 1999 was the lowest. Major agri-products of Red Soil II started to enter the market from 1997. Decline in major agricultural output prices had a direct negative influence on farmers' income. 5.1.2 Natural Disasters The disasters happened in project areas are drought, floods, cold temperature and typhoon. Unusual rainstorm and flood disasters happened in some project areas in 1998, 70% of the farmers affected by the floods and direct economic loss was more than 100 million Yuan. The severely strong frost happened in December of 1999 affect more than 90% of the fruit trees in some project areas, which had the most damage to orange, pomelo and other sub-tropical fruit trees. This disaster not only increased project cost, but also delayed the time of harvesting and reduced outcome of the projects. 5.1.3 The international bidding method of procurement The international bidding procurement is the most economic and effective procurement method in theory. But there were four shortcomings while utilizing the theory to implement the project for procurement of the goods. Firstly, there are difficulties in the transportation of large

- 34 - quantity agricultural materials needed in large areas in five provinces, and it is difficult to keep the materials with short shelf-life. Secondly, the procedure is too complex and usually takes a long time to be approved. Thirdly, the bidding cost is relatively high. Fourthly, some materials or equipment could not be suitable to every place in a large area covering 5 provinces. 5.1.4 Exchange Rate Risks The exchange rate was I SDR: 1.4873 USD and I USD: 8.60 Yuan in 1994, and changed to 1 SDR: 1.3047 USD and I USD: 8.28 Yuan in 2000. The World Bank credit was withdrawn from 1994 to 2000 when the exchange rate of USD and RMB was up, so the USD and the RMB used by project was relatively less. If USD and RMB depreciated in the future years of repayment, more USD and RMB will be paid.

5.2 Factors generally influenced by the Government 5.2.1 The Macro Economic Policy The macro economic policy often affected the project, the poverty alleviation policy increased investment in project area, the state sustainable agriculture development policy emphasized the environment protection, the tax policy adjusted the farmers' activities, the agricultural structure adjustment and the industrialization policy helped improve crop varieties and increase the farmer's income. 5.2.2 Department Policy During the implementation of the project, important supports were given by relevant departments such as departments of finance, taxation, agriculture and water resources etc. One shortcoming was the scarcity of counterpart funds from some Government sources which had an adverse effect on implementation of project. 5.2.3 Monitoring and Evaluation Monitoring and evaluation on project implementation were carried out in every watershed. 15 watersheds and 18 agro-processing plants were chosen for environmental monitoring and evaluation. Monitoring and evaluation has played and will continue to play an important role not only in the implementation but also in the operation of the project. 5.2.4 The participation of farmers The farmers, the men and the women were encouraged to participate in the project implementation. They were not only the participants but also the beneficiaries of the project. Their hard working and expectation of a better life were the basic factors for the final success of the project implementation.

VI. Sustainability

6.1 Major technical results achieved are sustainable. Major technical approaches of development under the project such as contour terracing and planting, orchard irrigation systems, intercropping, deep application of mixed chemical and organic fertilizers, different operation models of production systems, self -management farmer groups and new farming practice are widely accepted by farmers. The project has become demonstration of new technology. 6.2 Notable economic benefit achieved by the project could ensure the sustainable development of the project. With the project, production and the productivity of agriculture have been promoted and the economic income has increased notably which will ensure a sustainable development of the project.

- 35 - 6.3 Improvement of water and soil conservation has provided a good ecology condition for sustainable development of the project. The project implementation had a positive impact on environment. The wasted or barren land was changed into cultivated land and. Soil lost was controlled and fertility of the soil improved. Production in project area will increase continually. 6.4 Incentives given to the participants support the sustainable development of the project. The stabilization of the long-term land use contract and the preferential policy for agricultural development encouraged the farmers to work harder and get more benefit from the project. 6.5 High quality construction of watersheds established good examples for further development. High standard of watershed development has achieved high yields and quality of project products and brought higher income to the farmers under the project, which will encourage more and more farmers to follow the example established by the project. 6.6 Continuous attention will be paid on the operation of the project. Long-term land use contracts to the beneficiaries will be issued. Government's commitment to the project will be continued. Operation plan of the project has been formulated. VII. Performance of the World Bank and the Borrower 7.1 Performance of the World Bank The performance of the staff from the World Bank has been excellent. It was good for project unit staff using for reference. 7.1.1 The World Bank played a very important role in project identification and preparation of the project. The staff from the World Bank showed excellent ability and high efficiency when they worked in China. They brought many good ideas to improve the project design. 7.1.2 Great contribution were made by the World Bank supervision missions during implementation of the project Many valuable suggestions were brought out during the supervisions by the World Bank missions such as establishment of 20 ha. demonstration site in each watershed., enhancing the construction of the irrigation facility to meet the water requirement of the crops, diversification of cropping to reduce the risks of market and climate disasters on certain crops, paying more attention to the development of the livestock, water and soils conservation and agro-processing. All these suggestions were very helpful for implementation of the project.

7.2 The Performance of the Borrower 7.2.1 During the preparation of the project, the government gave strong support to the project preparation in the following fields: 1. site choosing; 2. financial support; 3. establishment of PMOs; 4. project design; 5. pilot project construction and demonstration. 7.2.2 During the implementation of the project, commitments to the project implementation by the governments at all levels were carried out. Great support from the government helped to overcome difficulties occurred during project implementation. Cooperation between the government and the World Bank was quite close and Bank's suggestions were well adopted.

- 36 - VIII. Experience and lessons learned from the project

8.1 Main experiences 8.1.1 The support from government was the precondition for successful project implementation. The central government paid much attention to this project and issued preferential policies for it. Local governments regarded this project as a sample of agricultural development and economic development and gave support on establishment of the PMOs, provision of counterpart fund, coordinating the relative department and making decision to solve key problems of project implementation. 8.1.2 Establishment of an effective operation mechanism was the foundation of successful implementation. 8.1.3 Establishment of a sound management system was the key point of project implementation. 8.1.4 Establishment of a professional technical team was the guarantee of successful implementation of the project. This team made their effort in every period of project implementation. They went to the field to study and research, made project designs, provided technical training, technical assistance and technical service to the farmers. They will continue to work hard for project operation.

8.2 Main lessons 8.2.1 More attention should be paid to the construction of high quality works. Fast built works in some project area did not match the technical standards and caused much repairing and rebuilding. 8.2.2 Funds should be allocated to project implementation units in time. In general, the credit funds were allocated to the project in time, but sometimes the credit funds were delayed in some project area. This brought shortness of funds and impacted the project progress. The counterpart funds were not enough in some project area and delayed the project implementation. 8.2.3 It was necessary to fully understand the standards and regulations made in SAR. Because of misunderstanding to the SAR, the over claim of the World Bank credit occurred in some project area and delayed the project implementation progress. 8.2.4 The long term enthusiasm of the project participants should be full cultivated. It is the guarantee of sustainable project development. Some project orchards were given up by the farmers in some areas. Some farmers were satisfied with the fact benefit gained from the project and ignored the long-term development. 8.2.5 Agricultural industrialization should be enhanced. Small scale and separated operations can not meet the market demand and compete with the foreign companies after entering the WTO. 8.2.6 The complexity of the agricultural product processing component should be paid with more attention. Most of these plants were designed in 1993. But the price and the market of the agricultural products changed a lot after 1994. The price of pig, fruit and silk declined continuously. Some agro-processing plants were cancelled. And some established plants has stopped their production. To construct the agro-processing plant by utilizing the World Bank credit often missed the development opportunity since the ICB procurement of the equipment would take much time. So a new way must be explored about the agro-processing project supported by the World Bank credit.

- 37 - Additional Annex 9. Photographs

WI~~ ~ ~ ~ ~~~~-

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Pomelo trees six years after beginning of project implementation.

Micro-watershed with reservoir.

- 38 - - 4 -_"a . *_

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Tea plantations.

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Fish pond development. b . }~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.

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Citrus plantation with irrigation canal.

- 39 -